The European Commission yesterday announced--with only a one-day delay--its formal proposal (PDF) for a regulation on standard-essential patents. It's not a question of whether the glass is half-full or half-empty: while they fixed some of the issues that were highlighted in recent weeks (not only minor but also structural ones), other problems persist.
The most fundamental problem is that what the EC's internal market commissioner Thierry Breton presented yesterday is not really considered useful by anyone anymore:
IP Europe, whose members are major net licensors, "[r]egrets the European Commission’s decision to propose a harmful and unbalanced [r]egulation."
Its counterpart in Brussels, the Fair Standards Alliance (FSA), "regret[s] however that the proposal fails to live up to the objectives that earlier drafts sought to aspire to." The FSA represents the views of major net licensees like Apple and some automotive industry players. Apple additionally has ACT, which Bloomberg exposed as an Apple astroturfing operation. That Apple front "is deeply concerned with recent changes made by the Commission in its proposed regulation" and "troubled by" the removal of a passage that suggested a "license to all" policy.
Regrets, regrets, concerned, troubled. Everyone regrets or expresses concerns. No one is happy. According to commissioner Thierry Breton's logic, that would essentially make both camps "bad-faith actors"...
This reminds me of the doomed Directive on the Patentability of Computer-Implemented Inventions, which was jettisoned by the European Parliament in 2005 in a near-unanimous vote because neither camp wanted it anymore (an important difference being that in that case, the original Commission proposal was viewed very favorably by one camp).
Put another way, the current proposal amounts to a lot of bureaucracy and some uncertainty--but ultimately for nothing, even if one wanted to devalue SEPs and complicate their enforcement. It's useless, and I'm skeptical that the co-legislation process involving the EU Council and the European Parliament has the potential to change that. Whether through hundreds of amendments or a "trilogue" (backroom negotiations between EC, Council and EP), this approach is very likely to produce something unlawful or unworkable (or even both at the same time). They're just structurally on the wrong track, and they obviously weren't able to do a complete overhaul over the past month.
That said, I'm happy to see that some of the criticism has been validated by recent changes. I identified many issues myself and also pointed to other writings. For my previous commentary, see the most recent post, the one before, and the link list at the end of that one.
The way I read the current proposal, the de facto antisuit mechanism has been softened. Previously, a SEP holder starting a parallel proceeding in a non-EU jurisdiction (which they now refer to as a "third country") would have been deprived of the right to enforce in the EU because an implementer could have obtained a notice of termination of the FRAND determination proceeding based on the SEP holder's "failure to engage", but the SEP holder would not have received one. Now, both parties get a notice of termination in that scenario, and the SEP holder can then go ahead and enforce.
What they say now is that the EUIPO-led FRAND determination should set global rates unless the parties agree otherwise. While global portfolio licenses are indeed a commercial reality, DG GROW's insensitivity to the concept of international comity is still evidenced by the failure to consider scenarios in which parties may want to obtain valuations in other jurisdictions for the patents they hold or use there (for instance, China). Commissioner Breton is just doing too many things at the same time, which must be the reason why he gave an answer at yesterday's press conference that makes no sense: responding to the question of whether the EU would like other jurisdictions to create similar SEP licensing regimes, he declared himself in favor of others doing so, but the EU's approach--even without the radical antisuit mechanism they dropped--is simply designed to be incompatible with similar rules in other jurisdictions.
Instead of adopting Qualcomm's proposal of a Reciprocal FRAND Agreement, the proposed regulation does not require the parties to commit to be bound by a FRAND determination. The way it works is this:
Whoever triggers the FRAND determination process (SEP holder or implementer) doesn't have to state initially whether the determination shall be binding.
When responding, the other party will have to tell whether it wants the determination to be binding.
But it won't be binding unless the party that started the process also says it accepts to be bound.
It's not even clear how binding a commitment "to comply with the outcome" is. The proposal doesn't clearly say that the parties have to enter into a license agreement on that basis. It envisions that the courts hearing SEP infringement cases between the parties will be informed of those commitments, but after a license agreement there would be no more basis for infringement action.
The term "enforcement", which I criticized as unclear, no longer appears in all contexts. At least Art. 34(1)(a) now says a SEP holder needs a FRAND determination "prior to any inititation of a SEP infringement claim" (emphasis added). That is clearer, though I'm still wondering whether SEP holders can save time by bringing declaratory judgment actions.
DG GROW tried--but in my view failed--to preserve the right to enforce SEPs during a FRAND determination. What the proposal now allows is to seek a "provisional injunction of a financial nature", which is not a sales ban but would merely require an implementer to make a deposit or post a bond to cover license fees. That's not going to discourage hold-out in the slightest. The way the proposal phrases it is also counterintuitive because they literally say that such an injunction should be sought in the courts of a Member States, but even when I asked around on LinkedIn, I got no indication that there is any jurisdiction in the EU (and possibly not beyond, other than interim payments ordered by Indian courts) that allows this. The way the proposal defines Member States courts, however, includes the Unified Patent Court (UPC). Is that a sufficient solution? No, it falls far short, not only because an obligation to make a deposit won't get any unwilling licensee to the negotiating table but also for the following reasons:
Many patents have been, and will be, opted out of the UPC.
Not even all EU Member States are UPC Contracting States.
The UPC doesn't have jurisdiction over national patents.
In the original draft, the definition of "patent" included utility models. That is no longer the case and represents a loophole for right holders. It's actually pretty cheap, quick, and easy to get utility models in Germany. What limits their usefulness that they don't enjoy a presumption of validity, but if they mirror a patent that has been examined by a patent office, that shouldn't be a problem.
The Commission's edits were obviously done under time constraints. The proposal even has typos. It would have been so much better to engage in consultation, given that the people who drafted it clearly don't understand litigation and commercial realities. For instance, that whole idea of achieving through an awareness-raising effort by the EU's trademark office that car makers will let suppliers pass license fees down in the supply chain is nonsensical. In the end, there are market force in play, and the regulation won't move the needle. I'm not blaming public servants for not understanding how things work in the economy, but then they have to solicit feedback based on specific proposals. They refer to extensive consultations, but those were not about the type of proposal that is now on the table and at risk of going nowhere.
Now it's too late for proper consultation. The thing has been put out and now the legislative process must take place, though it could just result in a rejection of the proposal as I mentioned further above.
The SEP Register part of the proposal is still bad for patent pools and has been rightly criticized by the European Telecommunications Standards Institute (ETSI). I can't see any serious improvement there. The only significant change concerning the register is that SEP holders are now in a better position to get a peer review if they disagree with the initial essentiality check. But appeals to the courts of law are still not even an afterthought.
I'm going to take a closer look at the proposal, the impact assesment, and the studies the Commission is referring to. The proposal notes that "[t]he impact assessment relied primarily ... on two external studies." One of them was produced by Charles River Associates, which engages in SEP policy work for Apple and may additionally hope to be hired by parties (especially implementers) with a view to the FRAND conciliation proceedings. The other is co-authored by the founder of IPlytics, who has a vested interest in certain approaches to SEP licensing and litigation that generate more business for that company than others. I'll be sure to write many more posts throughout the legislative process.
This is going to be waste of time, energy, and resources. The chances of that proposal culminating in a useful piece of legislation are very slim.
